The $150 Billion Shell Game

The debate in Washington about who is trying to raid Social Security and who is trying to save it is completely surreal for two reasons. First, Social Security is in no danger for at least a couple of decades. It is uncharacteristic for politicians of both parties to seem so concerned about such a distant threat. But second, this debate will have no effect on Social Security. That's not opinion or prediction: that's mathematics. Republicans and Democrats say they want the budget to balance without counting the Social Security surplus. It's an admirable goal for many reasons, but the safety of Social Security is not among them.

Social Security currently brings in almost $150 billion more a year in payroll taxes than it pays out in benefits. So suppose the government balances the non-Social Security budget. What happens to the Social Security surplus? By law, it is invested in special government bonds. (Even if there is no deficit, the government still must issue bonds to replace ones that mature.) So the Social Security trust fund will add $150 billion to its collection of government bonds, and the government will sell $150 billion less to the public.

And what if the government spends more than it takes in, apart from Social Security? Deplorable, to be sure. But what happens? The Social Security trust fund still acquires $150 billion in government bonds. If, say, there is a $50 billion non-Social Security deficit, government borrowing from the public will be $50 billion higher than if the budget was balanced--but $100 billion less than if there weren't a $150 billion Social Security surplus. The government owes somebody an extra $50 billion, but the situation of the Social Security trust fund is exactly the same in either case.

Maybe you're thinking, Yes, but this wouldn't be true if the trust fund could be invested in private securities, as many experts and securities dealers have suggested. Well, you're wrong. Even if the government ran a $150 billion non-Social Security deficit, the trust fund would still have $150 billion to invest. Every dollar the trust fund invests in private-capital markets is an extra dollar the government must turn around and borrow from these same markets, and the non-Social Security deficit has no effect on this melancholy equation.

If you dip into your 401(k) account to pay current expenses, it will leave you less money to retire on. Why isn't the same true of the Social Security trust fund? First, because as a legal matter, Social Security payments are a government obligation completely unconnected to the size or existence of the trust fund. Congress may amend future benefits, and the size of the trust fund might influence its decision whether to do so. But neither the trust fund's size nor what the money is invested in is affected in any way by the government's non-Social Security budget. If the government were to default on its bonds, the trust fund would suffer a loss and (though there is no necessary legal connection) payments might have to be reduced. And a larger government deficit makes a default more likely. But the chance of the government's defaulting either on its bonds or its Social Security obligations is infinitesimal, and the effect of even a $150 billion deficit on this chance is tinier.